CFPB's 'Minor' Changes to Mortgage Rules May Have Major Impact

WASHINGTON — The Consumer Financial Protection Bureau proposed several changes to its biggest mortgage rules on Wednesday which would effectively allow lenders to get more loans defined as "qualified mortgages."

The changes addressed key areas that the financial services industry has raised concerns about since the rules took effect in January, including giving more flexibility for loans to meet QM status despite its cap on points and fees and its restrictions on debt-to-income ratios. The agency also plans to allow more nonprofit organizations to write QM loans and be exempted from its rule governing mortgage servicing.

"Our mortgage rules are now helping to protect consumers all across the country from debt traps, runarounds, and surprises," said CFPB Director Richard Cordray in a press release. "Today's proposal would maintain those strong protections, while making minor changes to ensure consumers have access to credit. This includes helping nonprofits that provide working families with important pathways to affordable homeownership."

While the CFPB considers the changes "minor," industry representatives said the alterations could have a major impact. They also said it showed the agency was willing to work with lenders to clarify certain issues that have arisen with its regulations.

"This shows that the bureau is recognizing these difficulties and are willing to inject some common sense solution to existing problems," said Rod Alba, vice president of mortgage finance at the American Bankers Association. "This is an excellent first step in clarifying regulation, or at least giving banks some certainty when they're trying to abide by the rules … and I think consumers will benefit too by not having a very confused legal structure that prevents banks from making loans."

A majority of the proposed amendments will add flexibility and exemptions for nonprofit lenders. The CFPB is looking at allowing certain nonprofits that service loans from other associated nonprofit lenders to consolidate those activities in order to meet the "small servicer" exemption within its mortgage servicing rule. The agency is also considering expanding its ability-to-repay rule so that larger nonprofits, like Habitat for Humanity, can still offer interest-free, forgivable loans even if they don't meet the current exemption of making less than 200 mortgages a year.

But a key proposal that could affect all lenders is a change to the points-and-fees cap of 3% in order for a loan to be a qualified mortgage. The CFPB is considering a caveat to the rule that allows a lender to refund a borrower within a certain timeframe and still keep QM status if it later discovers that the points and fees were higher than the cap when it first wrote the loan as a QM.

Alba says this helps address some of the issues lenders had about accidently miscalculating a loan as a QM or getting too close to the cap and therefore, taking on more liability and legal risk in the long run.

"The rules are extremely complex and one of the haziest elements is the points-and-fees test provided under QM," he said.

But trade groups also agreed the changes do not address every concern about complying with the rules and potential legal risk, nor does it resolve all the questions surrounding points and fees. The CFPB did not, as many expected, clarify how affiliated fees that are passed through to a third party should be treated under the points and fees test.

"We appreciate the CFPB's review of mortgage rules in order to afford credit unions some regulatory relief while allowing them to continue to offer mortgages to their members," said Michael Coleman, director of regulatory affairs at the National Association of Federal Credit Unions. "However, more work needs to be done regarding the rules' treatment of points and fees and other areas of the mortgage rules. We continue to work with the bureau to help alleviate the regulatory burden on credit unions and help ensure they may continue to provide their members access to credit."

It appears that the CFPB is not done looking at other areas where it can amend its rules, particularly for larger lenders.

"In addition to seeking public comment on these proposals, the CFPB is also seeking input on certain other questions relating to the impact of the bureau's rules, including their effect on larger lenders that do not meet the definition of small creditor," the agency said in the press release. "The bureau may address these issues in future rulemakings as part of the bureau's ongoing efforts to ensure that the mortgage rules provide consumers with the protections they need while continuing to protect access to affordable credit."

While Alba says he is encouraged by this statement, he's also worried about the added changes lenders will have to make to their systems and processes after trying to ensure compliance with the first batch of rules.

"On the one hand, we are very encouraged the bureau is looking at regulations and is working to make them rational and workable," he said. "On the other hand, the piecemeal approach to regulation is greatly discouraging to members. This is an extremely expensive process and the tweaks to the system are very complex, if not at times impossible… We're going to have to develop a good method on that."